Crowdfunding’s Pros and Cons for Immigrant Startups

Crowdfunding is hot right now, but is it right for you? Learn crowdfunding’s pros and cons in this revealing interview with Evan Cohen, a top executive of Indiegogo.

Immigrant Business: Indiegogo has become one the of the top three crowdfunding sites on the web in a few short years. How did it get started?

Evan Cohen, Indiegogo

Cohen. Basically, our three founders — Slava, Danae, and Eric — believe that the system for entrepreneurs is broken in terms of access to capital. Before 2008, if you were a small business or you wanted to start a business, to get funded, you had to go to the bank and get a small business loan – which was really difficult. There are a lot of people out that are passionate about ideas for new businesses and new products, so our founders thought it would be better for the crowd to decide whether a business should exist or not instead of bank officer. The idea was to democratize capital so that anybody could get it.

Immigrant Business: So what’s your role at Indiegogo?

Founders Slava Rubin, Danae Ringelmann, and Eric Schell

Cohen: I’ve been with Indiegogo for about two years now and I’m in charge of the hardware design technology team, which means that we work with most of our largest hardware design technology campaigns, our entrepreneur campaigns you might say.

Immigrant Business: How do you define an entrepreneur campaign?

Cohen: The entrepreneurs we work closest with are usually trying to start a business, or trying to sell products. Why would a client want to run a campaign? Some people are looking for capital to start their business; some people are just looking to see if there’s anyone interested in helping them create a product and bring it to life. Some people need to get pre-orders for their product launch, while others are looking for market validation. What we’re seeing more and more, are campaigners using the platform for marketing, market validation and pre-orders.

Immigrant Business: So how does somebody get started? Let’s say you’ve invented a product like Seymour Segnit’s thingCharger. What’s your next step?

Cohen: People come to Indiegogo in every conceivable stage of development: Some just have an idea; others already have their business plans thought out, and may have started prototyping, and doing market research. If you’ve got an idea and know that there’s a passionate audience that would support it, by using crowdfunding, you can go directly to that audience and get them to help you fund your business with start-up capital. What you’re doing is taking funds from the crowd and using it to start your business, and in return – instead of giving some like equity or a dividend like in the stock market — you give them sort of reward for believing in your idea.

Anyone with an idea can come to the platform, create a campaign, and launch – any time. There’s no barrier to entry.

Immigrant Business: Could you give me an example?

Cohen: Let’s use the example of a restaurant. Even if you can’t get a small business loan, you could always go to the people that might be interested in the food that you’re cooking – and say, “Ok, if you give me fifty dollars today, I’ll give you a voucher worth of fifty dollars worth of food when my restaurant opens.” So in return for the $50 donation, you give your subscriber a meal voucher as a reward. Because Indiegogo is a totally open platform, you can come and literally crowdfund anything. There’s no limit to what can be launched, so if you have an idea —as long as it’s not illegal — you can launch it on Indiegogo.

Cohen: We’ve got a campaign based in Brooklyn where they’re promoting a product called Kosher Switch, which allows observant Jews to turn off the lights on the Sabbath, which is normally against Jewish law. Because the inventor couldn’t get a small business loan, he raised over $80,000 through Indiegogo. The key thing was that he knew the community in Brooklyn very well, and so he was able to get people to help him fund his first round of production. That $80,000 allowed him to go the manufacturer and place the initial purchase order and actually get the product up and running.

Immigrant Business: What a great story. So, is there a qualification process when people come to Indiegogo?

Cohen: Not really. It’s very self-serve. Anyone with an idea can come to the platform, create a campaign, and launch – any time. There’s no barrier to entry.

Immigrant Business: It can’t really be that easy.

Cohen: It is, and it isn’t. The misperception about crowdfunding is that it’s easy. More campaigns fail than succeed across the industry. People think, “I have a great idea, I put it on a platform, and random people around the world are just going to give me money because they like my idea.” But that’s just not true. There’s actually a very strategic way about launching a campaign and doing it properly and that sort of knowledge and experience are the reasons why some campaigns are successful and some aren’t. So when we work with entrepreneurs, we explain this methodology and this strategy so that they understand how to actually be successful on the platform.

The platform costs are 5%. So Indiegogo takes 5% of whatever the campaign raises, that’s the only fee.

Immigrant Business: Sounds like a great service. How much does it cost?

Cohen: There’s no cost for the service – so anyone can jump into Indiegogo at anytime, and we’ll definitely provide you with these services. We also have a ton of educational resources on our platform to help you. Of course; we are a business, but our fees are based on usage. The platform costs are 5%. So Indiegogo takes 5% of whatever the campaign raises, that’s the only fee. So if you come to Indiegogo and you don’t raise any money, it costs you nothing.

I should probably explain that the two models: – fixed and flexible funding.

Fixed funding is the traditional crowdfunding model. For instance, if I set a $50,000 goal and if I don’t raise $50,000 everybody gets refunded and it’s like it never happened.

Flexible funding means that if you don’t hit your goal, you get to keep your funding. This model is definitely more effective for like political action campaigns, non-profit campaigns, and also creative campaigns for filmmakers and artist where even if you fall short on your goal, you may have raised enough to make a go of the project if you scale back a little. So flexible funding is incredibly popular on the platform, but you to decide what you really need for your campaign.

Immigrant Business: So, what makes Indiegogo different from other crowdfunding sites such as Kickstarter?

Cohen: First of all, we have the flexible and the fixed funding – and that’s a really big differentiator. Number two – and probably just as important– Indiegogo is an entirely open platform, so anyone can launch a campaign at any time. We didn’t want to be the people that ever say no. We want the crowd to ultimately decide, so we don’t curate, we let the platform kind of curate itself.

Immigrant Business: Sounds good, but how do you do that?

Cohen We have an algorithm called our “Gogo factor” which is very similar to Google page rate – it actually uses metrics to determine which campaigns get promoted and which ones don’t, and it’s entirely based on merit

Immigrant Business: What advice would you give a prospective client – somebody who is thinking about crowdfunding?

Cohen: There are two pieces of advice. One: I would recommend going through our educational resources. If you don’t read the educational materials, don’t do the research, the preparation before hand, you’re going to be in a lot of trouble. The most important time for a campaign is the six weeks before a campaign goes live, and the preparation that goes into that will ultimately determine whether you have a strong launch and your campaign succeeds or not.

The first three days of the launch are crucial.If you get off to a strong start, then you’re going to do much better on the platform, and people are going to respond to that market validation, and get excited about your project. If you get off to a very slow start, it’s very hard to recover from that because, even if people see a great idea, if nobody else is looking at it, they get discouraged about it.

Immigrant Business: Right, so now – let’s say you’ve just come up with an idea and you’re about to launch. How do people find out about you?

Cohen: What we say is the first 30% of your funds come from your network – your friends, your family, and your connections. Face it, if you launch a campaign and you can’t get your mom and dad to contribute to it, you’re probably not going to do very well. And that first 30% leads to the second 30% — which is like a a friend to friend external network, the next generation of people that contribute to your campaign. And then the final 30-40% comes from the platform.

Think about it like this. Let’s say you’re hungry and you walk past a restaurant and nobody is eating inside. Psychologically, what are you thinking? The service must be bad or maybe the food isn’t that great. On the other hand, if you come across a restaurant where there’s a line out the door, you’re thinking, “Oh wow, that restaurant must really be good. It’s full of people, and there’s a line out the door. I’d really like to check it out.” Well, your crowdfunding campaign works the exact same way. You have to bring the crowd to your campaign and build that line outside of your campaign so that other people on the platform will be excited by it and follow. And you start about six weeks before launch getting your network of friends and family excited about your idea, and if that sort of viral emotion continues to build, that’s when campaigns really take off.

There are 10,000 campaigns live right now and we’ve had over 600,000 campaigns since we’ve launched in 2008

Immigrant Business: So it’s not just a turn key bit of magic. Indiegogo is a great platform, but you’ve got to know how to use it right. You’ve got to prime the pump, so to speak.

Cohen: Absolutely. And it goes back to that misperception — a lot of people see these mega million dollar campaigns on platforms and they think that they can do it too. But every campaign is entirely different – all about the strategy and preparation. And so the two keys to success are, one: read the educational materials, look at them understanding what you should be thinking about preparation, and two: research past campaigns that have been on the platform.

We did a study two years ago of campaigns that raised more than $100,000 on the platform, and we learned that over 85% of them had reviewed at least 10 campaigns or more on the campaign – really reviewed them. We have case studies up on the platform and you should be going through them and learning what woreds for them and figuring out how they did it, because case studies are the best examples of how it looks to be successful. You’d be surprised how many companies I’ve talked to that haven’t even looked at any campaign pages before and I’m like, “Well, there’s 10,000 campaigns live right now and we’ve had over 600,000 campaigns since we’ve launched in 2008.” There’s thousands and thousands of campaign examples that you should be reviewing and looking at to get inspiration for your own idea and your own campaign.

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